The Right Kind of Litigation Funding Regulation

As more and more litigants find financial support from third-party investors, calls for the regulation of litigation financing are increasing.  Some have called for the outright prohibition of such financing, while others want to place limits on the return that investors can earn by treating such financing as consumer lending that is governed by usury laws.  But other states have decided to permit such funding and regulate it only by implementing disclosure rules, so that the parties receiving financial support can understand the transaction and make their own decision about whether it makes sense for them.

In the last few months, Vermont and Indiana have joined several other states in regulating the business of advancing cash to plaintiffs in personal injury litigation.  These regulations include notice and disclosure requirements, standardized contract language, and bans on attorney referral fees.  In general, they are designed to make sure that such financial advances are made fairly and without deceiving consumers.

Litigation funding companies support this kind of regulation.  The Alliance for Responsible Consumer Legal Funding — a trade group including many of the established legal funding companies— expressed support for these new rules, describing them as “consumer protections.”  They believe that these rules will help promote standard, legitimate business practices that will make litigation funding more successful and more widely accepted.

This kind of regulation differs from what has been enacted in other states, most recently in Arkansas and Tennessee.  In these states, statutes have been passed to treat litigation funding like an ordinary loan, making it subject to interest rate limits.  The problem with this kind of regulation is that it treats litigation funding like a loan when it is really an investment because the funder is not assured of repayment and puts its investment at risk if the party receiving funding does not eventually receive an award.

Everyone wants to help consumers.  But the best way to help them is not to prevent them from making decisions about how to protect their rights. Rather, they are best protected by rules that help them understand their transactions and make rational choices about what justice is worth to them.

Topics:  litigation finance, consumer protection, third-party funding, litigation costs, legal costs

 Works Cited:

Alison Frankel, As States Regulate Cash Advances to Plaintiffs, Litigation Funders Cheer, Reuters (June 29, 2016) available at http://blogs.reuters.com/alison-frankel/2016/06/29/as-states-regulate-cash-advances-to-plaintiffs-litigation-funders-cheer/